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Collaboration and Friendship
Erik Hurst and Kerwin Charles have been colleagues and close friends since they met at the University of Michigan in 1997, when Charles was a new assistant professor and Hurst was finishing his PhD. They spoke with Chicago Booth Magazine recently about how their friendship shapes their research.

Behind the Bling

THE TRUTH ABOUT RACIAL STEREOTYPES ON SPENDING

By Patricia Houlihan
Published: February 29, 2008

Image by Chris Strong

When comedian Bill Cosby excoriated black parents for buying
expensive sneakers instead of “Hooked on Phonics” tapes for their kids,
he touched off a firestorm. Critics accused him of reinforcing the
stereotype that poor blacks—a group he clearly did not belong to—spent
money on high-status goods instead of investing in their children’s
future. Others said Cosby’s charge was legitimate. New research by Erik Hurst shows the stereotype is true. But the reason behind it is probably not what people think.

The anecdotal evidence seems to be everywhere. “There’s a perception
that if you go into poor black neighborhoods, the value of cars is much
higher there than in comparable—even white,
middle-class—neighborhoods,” said Hurst, professor of economics and
Neubauer Family Faculty Fellow. And, in fact, he found supporting data
eight years ago with Kerwin Charles, Steans Family Professor in Education Policy at the university’s Harris School of Public Policy Studies and visiting professor for 2007–08 at the Becker Center on Chicago Price Theory
at the GSB. They stored the idea away while they worked (together and
independently) on other studies about racial wealth differences.

When Cosby made his remarks in 2004, Hurst, who is white, and
Charles, who is black, had been focusing on conspicuous consumption and
the signaling value it communicates. The resulting study, “Conspicuous
Consumption and Race,” shows that blacks and Hispanics spend 30 percent
more than whites on clothing, cars, and jewelry—an amount that averages
out to around $2,000 per year per household. What’s more, blacks and
Hispanics are spending less on education and health care and saving
less money.

The reason? Status, according to Hurst and Charles. Because blacks
and Hispanics have lower income on average, they’re more likely to be
perceived as poor. Wearing nice clothes, driving a flashy car, and
sporting fancy jewelry, they hope, shows other people that they are not
poor.

What’s more, white people do it, too, their research shows.

In comparing spending data for whites in southern states with that
of whites of comparable income in the Northeast, they discovered that
southern whites outspend northeastern whites when it comes to highly
visible, highly portable consumer goods that denote status. “People do
care about their position in society and will work hard to signal their
relative rank,” Hurst said. “If people don’t know your income and you
want to show them, the way to do it is to consume visible goods. You
see it among blacks, whites, and Hispanics.”

Statistical Support

To document the differences, Hurst and Charles looked at the Consumer Expenditure Survey (CEX), a detailed survey of what people consume that the U.S. Department of Labor uses to compute the Consumer Price Index. They chose data from 1986 to 2002. With Nick Roussanov, PhD ’07,
they also ran their own survey to see which consumer goods denote
higher income; respondents said clothing, cars, and jewelry—items that
are easy for strangers to see.

Holding income constant, Hurst and Charles found a racial gap in
overall total spending of around 30 percent. What’s more, it held
constant no matter how they subdivided people: by age, gender, marital
status, and education. The biggest share of additional spending—around
40 percent—went for clothing. Although clothing is less expensive than
cars or jewelry, people buy it more often, Hurst said.

To support their model, the researchers sought an explanation beyond
taste-based preferences. “It could be just a preference story,” Hurst
said. “Lots of different subgroups and cultures like different goods.
But we thought it might not be the right explanation in this case,
given all the other sociological work on how visible consumption has a
role in signaling status to others.” So the researchers examined the
CEX data among each state and found that within each racial group,
residents of states with lower incomes spent more on clothing, cars,
and jewelry than residents of higher-income states.

When we realized that white people are doing the very same thing,”
Charles said, “we saw what that implies—that racial difference is a
fact, but it obscures the other mechanism that explains the behavior.
Blacks spend more, on average, because they belong to reference groups
that are so much poorer than white reference groups.” And, as Hurst
added, “If you’re high income but belong to a poor income group, all
else equal, people are going to think you’re poor. The benefit for you
is high to distinguish yourself from the poor group.”

Sending a Signal

Economist and sociologist Thorstein Veblen coined the phrase
“conspicuous consumption” at the end of the 19th century to describe
the excess of the Gilded Age. The current equivalent is “bling,” a word
created by rap artists who boosted themselves out of the ghetto with a
new form of music and showed their improved economic status with flashy
jewelry, expensive cars, and designer clothes. If you Google
the word “bling” in a search for images, more than a million come up in
less than a second. A word that didn’t even exist ten years ago is now
shorthand for conspicuous wealth. The Oxford English Dictionary defines it as “ostentatious jewelry. Hence: wealth; conspicuous consumption.”

According to Charles, the word has caught on because it captures a real
phenomenon. “In the black community, this particular kind of
consumption is important in some way, especially for young people,
because random, anonymous interactions are the ones that most concern
them.” Young black men are the most economically disenfranchised social
group; they also have higher incarceration and unemployment rates than
any other group, he pointed out. Charles quoted a popular rap song. “In
it, the guy says, ‘I’ve got a job.’ He’s 25 years old. Why would you
say you’ve got a job? Who doesn’t?

“Here’s who doesn’t: people he knows. And so he says, ‘Unlike these
guys, I have a job. You don’t believe me? Look at this gold chain I
bought.’ If everybody around him had a job, he wouldn’t have to say it,
and he wouldn’t have to signal it. It wouldn’t be a big deal.”

In fact, Charles and Hurst found that between black communities in
different locations, an individual of a given level of income who lived
in an area with a higher average community income spent less on
clothing, cars, and jewelry than someone with a similar income who
lived in an area where the community income, on average, was lower.
Blacks with affluent peers have less need to signal high status, they
said. Charles used his own experience to illustrate the point. “If a
police officer pulls me over in a college town that has eight black
residents, four of whom are professors, he’s already thinking, ‘This
guy could be on the faculty.’ But when I’m pulled over while driving
through the south side of Chicago, the cop is thinking exactly the
opposite sort of thing. And so, anticipating that, our paper would
suggest, I’d go to certain lengths in a preparatory way—by having a
certain car or wearing a tie.”

The affect of the peer group holds true for whites and Hispanics as
well, Hurst said. “When blacks of a certain income live around poorer
people, they spend more than they would if they lived around richer
peers. Whites do exactly the same thing. So do Hispanics,” he said.
Given the racial sorting that’s typical of most neighborhoods, he
added, “blacks tend to live in certain areas, whites in others, and
Hispanics in others. The problem is that, on average, blacks live
around poorer people, and whites live around richer people, so that on
average, blacks spend more on visible goods than whites do.”

Hurst said the research makes clear that in this instance, blacks
and whites are “exactly the same in what their preferences are. And
both respond to the exact same kind of incentives. It just so happens
that a black person of a given income has poorer peers than a white
person of the same income, and that’s well documented. Because their
peer groups are different, they do different things.”

Why It Matters

For Hurst and Charles, the black and Hispanic spending habits they
document can be explained by rational economic behavior about signaling
and reference groups; additionally, the habits are independent of race.
Still, one of their findings may trouble policy makers—that funds spent
on high-status items mean fewer dollars are set aside in savings, or
spent on health care or education. Young adults in particular—those in
their 20s and 30s—are more likely to spend money than those in their
40s and 50s on high-status clothing, cars, and jewelry because they’re
more likely to be concerned with attracting a partner. “They borrow
against the future because it’s important when you’re 25,” Charles
said. “By the time people are 55, the signaling effect is gone.”

For policy makers who want to promote certain behavior—for instance,
increasing savings among low-income people—it’s important to understand
the type of mechanisms at play for people’s spending decisions, Hurst
said. “If my goal is to increase health care spending among a certain
group, and I give that group a direct transfer of dollars, they might
not spend it on health care because there’s some other mechanism
driving their spending decisions—their pursuit of status.

“That might then affect the optimal way I’d want to achieve my
policy goal. I might not just give money for them to allocate to health
care, I might set up health care clinics, for instance. However, if I
do that, or I find some other way to subsidize health care, the group
might reduce the amount they spend on health care and spend the
additional money on this other status-seeking goal. That’s why you need
to think about the optimal way to deliver policy objectives in a world
where you have the status-seeking motive,” Hurst said. “We don’t have
the solution. But we show that mechanism is important to think about.”